Does the Latest Failure of Bank Regulation Mean Banks Can't Be Regulated?

Workers erect a sign for JPMorgan investment bank at Canary Wharf in London in a December 21, 2011 file photo
(REUTERS/FINBARR O'REILLY)

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Almost four years after Americans became obsessed the idea of "too big to fail," JPMorgan found a way to lose $2 billion in one quarter without breaking a sweat — or any securities laws. Ever since Lehman Brothers collapsed in 2008, Wall Street and Washington have been doing battle about the best way avoid similar meltdowns and the massive financial losses that often end with taxpayers cleaning up the mess. But yesterday's "egregious mistakes" have some wondering it it's a hopeless cause.

One of the most contentious issues with financial regulation over the last three years has been the Volcker Rule, a regulation built into the Dodd-Frank reform act, that's intended to prevent exactly what JPMorgan did: using its own money (not its customers' money) to make risky investments in an effort make profit for itself. (That's what's known as "proprietary trading.") Morgan says it was simply "hedging," making investments in an effort to offset risk in other parts of it business, which could technically still be allowed by the Volcker Rule. What experts are saying now is that the difference between the two tactics is almost indistinguishable ... and that's a big problem.

No one has railed against the Volcker Rule more than JPMorgan CEO Jamie Dimon, the man who has been lauded as "the king of Wall Street" for shepherding his bank through the financial crisis with very little damage. And even though the rule isn't actually in place yet, Dimon says what happened with their recent bets wouldn't have violated it. As Matthew Yglesias points out, that means the rule apparently has a loophole big enough to drive a $2 billion truck through, yet Dimon still thinks that's not big enough. JPMorgan can survive a $2 billion loss right now, but think of the damage they could do without that pesky regulation.

Naturally, folks in Washington are already saying that the JPMorgan case underscores the need for even more regulation. But at this point the Volcker Rule — which has been attacked by Wall Street and struggled to get passed by Congress — has been our best shot. And it's already failed miserably. That might lead some (like Business Insider's Pascal-Emmanuel Gobry) to conclude that more regulation is unlikely to make any difference at all. Maybe a bank the size of JPMorgan simplycan't be regulated in any way that matters. The fact that it was it was this bank, the one praised up and down for managing risk so well during the subprime meltdown, that is currently blowing up is especially troubling ... and galling to those trying in vain to control our financial giants.

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